IJRFM Volume 6, Issue 6 (June, 2016) (ISSN 2231-5985) International Journal of Research in Finance and Marketing (IMPACT FACTOR – 5.861) International Journal of Research in Finance & Marketing Email id: editorijrim@gmail.com http://www.euroasiapub.org 209 Financial Credit Risks and Earning Efficiency; Empirical evidence from banking sector Pakistan. Hamid Salman 1 M.Phil. Scholar, University of Engineering & Technology, Lahore, Pakistan Bilal Aziz 2 Assistant Professor, University of Engineering & Technology, Lahore, Pakistan Ahsan Nazir 3 M.Phil. Scholar, University of Engineering & Technology, Lahore, Pakistan Abstract: Paper determines the time variant associational effect of financial credit risks determinants on earning efficiency of commercial bank. The study has objective to determine the propelling short and long-run influence of financial credit risk and financial regulatory indicators on commercial bank’s profit earning efficiency in Pakistan for the period 2005q1 to 2015q2 by employing Auto regressive distributing lag (ARDL) of Pesaran et al. (2001). Researcher utilized non- performing credit to total advances and credit loss provision to non-performing advances as proxy measure of credit risk along with regulatory indicator like liquidity risk and capital adequacy; however, the results shows that non-performing credit to total advances, credit loss provision to non-performing advances (credit risk) and total advances to total deposit (liquidity risk) have significant negative influence on return on assets and return on equity (earning efficiency), capital adequacy have negative effect on return on equity and thereby leading them to serious threat of distress and financial erosion, dedicated efforts required to build up competent risk control management that can efficiently improve financial sector’s earning capacity by reducing threat of risk leading to financial erosion. Such empirical Outcomes are chiefly attractive to higher management of financial institutions and financial policy makers of the country as they provide assistance to them in building sound policies regarding credit control management to sustain economic development of financial banks by improving their level of attractiveness. Key words: Credit risk management, earning efficiency, Liquidity risk, Banks, Auto regressive distributing lag (ARDL 1. Introduction: In developing economies; due to least number of borrowers have limited excess to capital market for their financial supplies. Commercial banks functions just alike blood veins in human structure (Felix Ayadi et al., 2008) as it possess more than 80 % of all financial assets; it play’s a predominant role in spreading credit facilities through channelizing the financial funds from depositor to borrower; enabling the investors to exploit new entrepreneurial business ventures and bubbling country’s economic prosperity (Abbas A et al. 2014). Therefore; to achieve high level of economic growth in developing nations the efficient role of intermediation by financial banking sector is